Question

CALCULATE: Shopping with Interest

This activity will illustrate how even smaller purchases cost more when you purchase on a credit card and do not pay the balance in full each month. For this activity, we will use the credit card calculator from bankrate.com; open it in another window. We also make these assumptions:
● Your credit card’s interest rate (APR) is 19.9%.
● The minimum payment due each month is 3% of your starting balance.
Part I: Practice with an Example
1. Suppose you have a credit card bill of $1,275 for the month of October. If you pay the full balance before your bill is due, how much will you pay in interest?
2. With your bill paid off and starting back at $0, the latest video game comes out and costs $60. You put it on your credit card and can’t afford to pay the whole bill all at once, so you make the minimum payment each month.
a. How much is that minimum payment?
b. Use the credit card calculator to determine how much total interest you’ll pay on this debt.
c. When you include the purchase price and the interest, how much does the video game cost you in total?
3. Assume your balance is back at $0. You desperately want a TV for your bedroom, but you don’t have any money saved. You put the $229 TV on your credit card and make the minimum monthly payment each month.
a. How much is that minimum payment?
b. Use the credit card calculator to determine how much total interest you’ll pay on this debt.

Answer 1

Step-by-step explanation:

Part I: Practice with an Example

1. If you pay the full balance of $1,275 before the bill is due, you won't have to pay any interest. This is because you are paying off the entire amount owed within the grace period, which is the time between the purchase and the due date of the bill.

2.

a. The minimum payment is calculated as 3% of your starting balance, which in this case is $1,275. So, the minimum payment would be $1,275 x 0.03 = $38.25.

b. To determine the total interest paid on this debt, you can use the credit card calculator from bankrate.com as mentioned. Enter the starting balance of $60, the APR of 19.9%, and the minimum payment of $38.25. The calculator will provide the total interest paid over time.

c. To calculate the total cost of the video game, you would add the purchase price ($60) to the total interest paid. This would give you the overall amount you would pay for the video game when considering both the purchase price and the interest accrued over time.

3.

a. Similar to the previous example, the minimum payment for the TV purchase would be 3% of the starting balance, which is $229 x 0.03 = $6.87.

b. Again, you can use the credit card calculator to determine the total interest paid on this debt. Enter the starting balance of $229, the APR of 19.9%, and the minimum payment of $6.87. The calculator will provide the total interest paid over time.

It's important to note that paying only the minimum payment each month can result in significantly higher interest costs over time. If possible, it is advisable to pay more than the minimum payment to reduce the overall interest paid and pay off the debt sooner.

Answer 2

To calculate the cost of shopping with interest, we need to consider the credit card's interest rate and the minimum payment due each month. If you pay the full balance, you won't have any interest charges. The minimum payment is calculated as 3% of your starting balance, and the total interest can be determined using a credit card calculator.

Step-by-step explanation:

In order to calculate the cost of shopping with interest, we need to consider the credit card's interest rate and the minimum payment due each month. Let's answer the questions one by one:

1. How much will you pay in interest if you pay the full credit card balance before the due date?

If you pay the full balance, you won't have any interest charges. So, in this case, you won't pay any interest.

2a. What is the minimum payment for a $60 video game if you put it on your card and choose to pay the minimum amount?

The minimum payment is calculated as 3% of your starting balance, which would be $1.8 ($60 x 0.03 = $1.8).

2b. How much total interest will you pay on this $60 debt?

To determine the total interest, you can use the credit card calculator from bankrate.com mentioned in the question.

2c. How much does the video game cost you in total, including the purchase price and interest?

To calculate the total cost, you would add the purchase price to the total interest paid.

3a. The minimum payment for a $229 TV would be:

The minimum payment would be 3% of your starting balance, which would be $6.87 ($229 x 0.03 = $6.87).

3b. To determine the total interest, you can use the credit card calculator from bankrate.com mentioned in the question.